Soundthinking (Nasdaq: SSTI), formerly Shotspotter, offers SaaS-based gunshot detection systems that triangulate gunshot sounds to trace the precise location of firing. It provides sensors and earns recurring revenues from cities based on square-mile coverage. While the average city coverage stood at 6 square miles, the top cities like Chicago and New York City have sensors monitoring 110 and 70 square miles of area, respectively, with Chicago alone bringing in $9 million in revenues. The instrument enables law enforcement and paramedics to arrive at the scene earlier, trace shell casings more efficiently, and subsequently expedite the arrest of the suspects. The company added a record 155 square miles of coverage in 2023 and hopes to add another 120 square miles this year. SSTI was trading at 2X sales in April with a $200 million market capitalization and a massive operating leverage. The company has showcased a historical annual growth rate of 15%. Management is confident of pushing gross margins to 70% from 60% as the firm improves outreach in more cities and better utilizes existing operations centers, which can handle much more volumes. However, penetration in the US remains low due to political controversy in recent years about how Shotspotter could lead to over-policing of black and minority communities and the defund-the-police initiatives after George Floyd’s death posing problems in some cities. Here, we summarized an April bullish thesis published by cobia72 on Value Investors Club.
An aerial view of a city showing the presence of public safety solutions such as Shot Spotter All in One.
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The thesis assumes revenue growth of 15% over the next three years, with gross margins increasing to 63% and EBITDA margins ramping to 32% by 2026. It would translate to multiples of 1.5x sales and a 7.4x P/E ratio. However, the stock can trade at $74 per share, implying a 360% upside from prices in early April. The thesis sees an opportunity in Chicago, as city mayor Brandon Johnson, who sought to discontinue Shotspotter use in the city, decided to extend the contract due in March through November due to mounting pressure from the police superintendent and several of the city’s aldermen favoring Shotspotter use. Furthermore, the city council will vote on a bill to transfer control of the Shotspotter contract in each ward to its alderman. Soundthinking CEO Ralph Clark recently highlighted that the company is positioned to grow ARR up to 15% if the Chicago contract stays in place.
SSTI also acquired a weapons detection technology called SafePoine in 2023. This technology uses cameras and sensors to unobtrusively detect weapons when people pass through them, making them ideal for use in corporate offices, hospitals, and banks. Meanwhile, Soundthinking’s CaseBuilder product is a digital folder that stores case information. The digital case can be connected to other case folders to identify links between cases for better outcomes and to prepare for courtroom trials. Soundthinking recently secured an $18 million CaseBuilder deal with the New York City Department of Corrections, which could pave the way for deals with other prisons in new cities. The company’s suite of products also includes a law enforcement search engine called CrimeTracer, which enables data searches across US agencies, and ResourceRouter to position officers in a way likely to reduce crime maximally. The thesis also highlights an international opportunity for Shotspotter, which entered Uruguay, Brazil, and Mexico. Regardless of how the Chicago contract turns out, the thesis recognizes a meaningful growth story moving forward.
SSTI is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 7 hedge fund portfolios held SSTI at the end of the first quarter, which was 7 in the previous quarter. While we acknowledge the potential of SSTI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as AM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: This article was originally published at Insider Monkey.
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